U.S. Likely to Move to International Accounting Standard


New York, NY – Last week, the Securities and Exchange Commission proposed a timetable for moving all U.S. publicly traded companies from its traditional accounting rules or Generally Accepted Accounting Standards (GAAP) to the International Financial Reporting Standard (IFRS) by 2014.  In addition, the SEC made an allowance that the largest U.S. public companies could begin using these global accounting rules even earlier.  

The SEC voted unanimously to adopt this “roadmap”, which will be published in the Federal Register and will be followed by a 60 day public comment period.  If this proposal is eventually approved, the SEC estimates that 110 companies would be eligible to use IFRS at the end of fiscal years ending after December 15, 2009, depending on their size and industry.

This roadmap includes a provision for the SEC to make a final decision in 2011 whether to mandate all SEC registered companies to use IFRS.  The commissioners would base that decision on the progress made on a variety of factors – including the funding the International Accounting Standards Committee Foundation (which oversees the IFRS), IFRS data tagging, and accounting education.

The proposal by the SEC to move to the IFRS is based on the fact that more than 100 countries now use, or are adopting it, including all 27 European Union members as well as China, Japan, Canada and India.  In fact, more countries are now using the IFRS than are using GAAP.  The following timeline published by the Financial Times provides a review of how the IFRS has been adopted by the international business community (http://www.ft.com/cms/s/0/83e17ff2-7457-11dd-bc91-0000779fd18c.html).

Given the fact that many U.S. investors now own non-US stocks (and many non-US investors own US stocks), a move to a global accounting standard will make comparisons more accurate.  In addition, a single set of globally understood accounting rules should also reduce the costs faced by large multinational corporations, who currently have to file under both accounting rules.

However, moving to the IFRS will create its own series of problems.  First, the move is likely to be costly and much more involved than most people think.  The change doesn’t just mean a shift in reporting rules, but it has significant implications for a company’s systems and processes.  In addition, the change can have implications for the business, including issues like contracts, tax, or debt covenants, etc. 

Probably the biggest change will be mindset.  US companies have become accustomed to GAAP – a rules-based accounting regime.  The IFRS is a principles-based approach, and therefore there are fewer hard and fast rules to dictate specific accounting issues.

Additionally, the move to the IFRS will undoubtedly cause considerable confusion during the transition period as the market gets used to the new accounting rules.  In fact, some experts believe that the earnings of U.S. companies who move to the IFRS first are likely to be overstated when compared to companies that continue to report under GAAP.  As a result, investors could be misled by the differences between the two set of accounting rules.  Of course, this confusion should clear up over time as everyone becomes more familiar with the new IFRS rules.

As you might expect, the large accounting firms are likely to be big winners when and if US companies begin shifting to the new rules, as these firms will need considerable expertise and guidance to make the change.  It could also be argued that research providers might also benefit from the transition to a new accounting standard as investors seek out third-party analysis to better compare firms that are reporting earnings under GAAP versus firms that have moved to the IFRS.  However, international investors are likely to be the biggest winners over the long haul as a single accounting standard enables them to more easily compare companies around the world and therefore make better investment decisions.

Click here to get a more detailed analysis of the difference between GAAP and the IFRS accounting standard (http://www.ft.com/cms/s/0/22b39fae-745b-11dd-bc91-0000779fd18c.html).


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